Transparency Debate in PBM IndustryConsumer Driven Healthcare SummitSept. 13-15, 2006 in Washington, DC

Marina Tackitt

PBMI

Session Objectives

Summarize Complexity of Drug Benefit ManagementDefine Concept of Transparency in Drug BenefitsCompare and Contrast Traditional PBM Pricing With Transparent Pricing ModelsIdentify Critical Issues in Transparency Debate

Rx Management Challenges Grab HeadlinesRx Management Challenges Grab Headlines

Drug Benefit Management Evolves Over Time

1970s: The Card Era1980s: Claims Processing Goes On Line1990s: PBMs Emerge2000 & Beyond: Complex PBM Revenues Create Black Box

How Do PBMs Make Money?

% of Profits0%

10%

20%

30%

40%

50%

10%

Admin. Fees

21%

Retail Markup

22%

Mail Markup

47%

Manufacturer Revenue

Some Definitions for Our Discussion

PBM Administrative FeesMail and Specialty Pharmacy MarkupRetail Markup, Network SpreadManufacturer Revenues

Continued Profitability Growth

Payer Profit Contribution

Processing feesIncentives for clinical performanceMail order, specialty

Supplier Contributions

Pharmaceutical Firms

Rebates, Admin, ClinicalPharmacy Networks

Spread, Admin fees

PBM

’s P

rofit

abili

ty S

ourc

e%

The Changing Financial Dynamic

1990s Today

Defining Transparency for Drug Benefits

Market Definition– PBM Discloses and Provides Full Extent of Pre-negotiated

Supplier Discounts in Exchange for Flat Billing Mechanism (Per Claim, PEPM, PMPM, Etc)• Retail Network Pricing• Mail-order and Specialty Pharmacy Pricing• Manufacturer Rebates, Discounts

Vendor Definitions– Disclosure only? – Disclosure + pass along some pricing?– Disclosure + pass along all pricing?

Sample client– Midsized employer– New PBM contract within the past 18 months, with

competitive rates– 3-tier copay

What Does Transparency Mean to My Costs?

54%

46%

Pharma Admin. & Service Fees

Net PBM Revenue of $3 to $5 Per Claim

PBM Service Costs / Rx

Traditional Revenue Model

Admin Fees $xxNetwork Spread $xxRebates $xxPharma Admin Fees $xxOther Misc Fees $xxSubtotal $3-$5/Rx

Transparent Revenue Model

Flat Fee Per Rx, PEPM, or PMPM $3-$5

Subtotal $3-$5/Rx

Traditional PBMs that are willing to offer clients a transparent pricing model may seek to obtain the same level of revenue, all derived from the client in the form of higher administrative fees. The market may be unable or unwilling to bear the pricing that will be required for traditional PBMs to succeed under this type of model.

PBMs Will Capture Revenue, Regardless of Model

PBM Perspectives on Transparent Pricing Model

Some View Transparency As Marketing Buzz WordMajority of Large PBMs Offer Traditional and Transparent PricingMany New Market Entrants Building Business Model on Transparency

Comparing PBM Pricing Models

Est. Net Cost Analysis Per Claim

+ Administrative Fees

+ Dispensing fees

- Rebates

- Network Fees

- Cost Share

Est. Net Cost

- Network Discounts

Gross AWP

Vendor CVendor BVendor ATraditional Pricing

ModelCost Element

Transparent Pricing Model

This traditional pricing analysis should be supplemented by an evaluation of how drug mix could change under each management model based on each vendor’s formulary, clinical program strategy, financial incentivesetc.

Comparing PBM Pricing Models

PBM ABid: AWP – 15%

D.F. $2.00Rebate guar $5.00 min.Rebate share 75%Admin fee $ .30/rx

Controlled Release Drug = $50

$39.80

PBM XBid: AWP – 16%

D.F. $1.75Rebate guar $20.00 minRebate share 80%Admin fee $ 0

Extended Release Drug = $80

$48.95

How Does Vendor A’s Transparent Pricing Compare to Vendor B’s? Which Vendors Will Offer a Guaranteed Effective Rate as Part of Overall Proposal? What Services Will Be Included in the Flat Pricing Offered? How Will Differences in Clinical Program Strategies Influence Net Costs?

Evaluating Financial Variables

What Audit Rights Are Included in Contract?– Network Agreements– MAC Pricing TablesWhat Manufacturer Audit Rights Are Included?– Access to Top 15 Agreements Annually– Contracts, Invoices Submitted to Manufacturers, and

Reconciliations

Evaluating Financial Variables Cont’d.

What Service Bundle Will You Require the Vendor to Manage? How Effective Will Each Vendor Be in Executing on The Basics?– Claims Admin, Member Education, Reporting, Network

Management, etc.What Experience Does Each Firm Have Serving Customers of Similar Size And Scope?What are the Service Guarantees?

Evaluating Operational Variables

What Resources Does the PBM Have to Help Drive Utilization of Cost-effective Medications? How Effective Have the Firm’s Clinical Programs Been Historically? Are The Firms Willing to Guarantee the Effectiveness of Their Programs?

Evaluating Clinical Variables

Drilling Down Into Transparency Practices

PBMI Has Identified Practices Consistent With Transparent PBM Relationships in the Areas of:– Claim Pricing Calculations– Cost Sharing Calculations– Pharmacy Interaction– Utilization Management– Formulary/Rebates

Imperatives for Truly Transparent Contracts

Demonstrated Transparency in Supplier Pricing Arrangements– Network Pharmacies– Pharmaceutical Firms

Effective Strategies to Improve Clinical Outcomes– Compliance, Adherence to Guidelines, Etc.

Recapture Role of Educating Providers and Consumers on Relative Value of Medications– Become Key Participant in Evaluating Outcomes & Costs of

Medications When Used By Patients In Real-World Settings

What’s the Appeal of Transparency?

Simplify the PBM Procurement ProcessLeverage More Value From the PBM-supplier RelationshipReduce or Eliminate Potential for Perverse Incentives to Increase Costs– e.g. Pushing Higher Cost Brand Drugs to Obtain RebatesObtain Better Information to Facilitate Better Plan Coverage and Management Decisions– Focus on Net Cost of DrugsReduce Overall Cost of PBM Relationship

The Challenge of Transparency

Could Create Negative Financial Position for Employers, Other Payers– Upfront Cash for Admin Fees May Not Be Offset By

Incremental Supplier Discounts– Supplier Contracting Risk Shifts to Employer or Payer

to Manage• Steerage Management Programs Must be in Place to Obtain

Maximum Value From the Transparent Contracting Approach

Audits May Be Required To Ensure Transparency– More Comprehensive than Past Audits– Different Audit Skill Set / Industry Expertise Required

The Challenge of Transparency Cont’d.

Inexperience of New Market Entrants– Service Guarantees are Important– Service Bundle Expectations are ImportantWill PBMs Lose Their Interest in Negotiating Aggressive Supplier Contracts?

Recognize the Appeal– Know What You’re Paying– Get Appropriate Value For Those Fees– Chance to Strip Significant Cost From The SystemConfront the Challenge– Difficult to Know If You’re Really Getting Full Value of Supplier

Discounts– Fees Paid By Employers and Payers Could Go UP, Not Down (If

Pricing Discounts are Not Supplied)– Basic Service Levels Could Drop If Firms Choose Inexperienced

Partners Solely for Their Interest, Ability to Adopt TransparentPricing

Before Making a Change…

Improve Performance of Your Rx Benefit Plan

Create Incentives for Improving Clinical PerformanceFocus on Lowest Net Cost Drug that is Medically AppropriateImplement PBM Performance GuaranteesAudit PBM, Manufacturers

Reframe Your PBM Relationship

Clinical PerformanceFinancial PerformanceOperational PerformanceManaging Your PBM and Your Plan

It’s Still All About The Right Drug…

PBMI Research Indicates Increased Collaboration

PBMI’s Annual Study of U.S. Employers > 2,500 Employees on Satisfaction With PBMs Shows Overall Increase in Alignment of GoalsTrend Also Seen in 3 of 4 Individual PBMs With Two Years of DataPBMs Appear To Be Responding To Employers’ Transparency Issues

Increase in Employer-PBM Alignment

91%100%PBM D

78%77%PBM C

80%76%PBM B

91%87%PBM A

85% N=41682% N=472All PBMs

2005 Percent of Employers Perceiving Goal Alignment

2004 Percent of Employers Perceiving Goal Alignment

Pharmacy Benefit Manager

The PBM Transparency Debate

BackgroundThe StakeholdersIn Whose Best Interests?Attempts to Regulate PBMsMarket Pressures– Future Trend of U.S. Business Practices– Employer Coalition Leverage– CDHPs– Competition

The PBM Transparency Debate

“…[V]igorous competition, rather than regulation, in the marketplace for PBMs is more likely to arrive at an optimal level of transparency. Just as competitive forces encourage PBMs to offer their best price and service combination…to gain access to subscribers, competition should also encourage disclosure of the information that health-plan sponsors require to decide which PBM to contract.”

-Improving Health Care: A Dose of CompetitionJoint FTC/DoJ Report, June 2004

PBMI is the industry’s only membership organization exclusively dedicated to helping health care purchasers maximize the value of drug benefit plans.

Speaker Contact:

Marina J. TackittBusiness DevelopmentPharmacy Benefit Management Institute, LP620 East Capitol Street, NEWashington DC 20003-1233T 202-548-4222F 202-548-2444E-mail: mtackitt@pbmi.comVisit us at www.pbmi.com